Yuan slips past eight to dollar

MORE FLEXIBILITY China allowed its currency to strengthen against the US dollar in a move that pleased some in the US who have said Beijing manipulates the yuan

BLOOMBERG

The yuan strengthened beyond eight to the US dollar for the first time in more than 12 years, prompting speculation that China's government is allowing faster gains to win US support for its currency policy.

Chinese Foreign Ministry Spokesman Liu Jianchao (劉建超) said last Thursday the government would make the exchange rate more flexible, the day after the US Treasury Department decided against accusing China of manipulating its currency in a semi-annual report.

"The Treasury report was well received by China and the break of the `eight' level is probably a thank you for that," said Sean Callow, a currency strategist at Westpac Banking Corp in Singapore.

The currency closed at 7.9976 to the US dollar. It ended trading last week at 8.0062, from 8.0037 on the day the semi-annual Treasury review was released.

US lawmakers are pushing for faster yuan gains to narrow a trade deficit with China that reached US$201.6 billion last year.

They say China keeps the currency artificially weak to make more competitive exports that helped propel the pace of growth in the country to the fastest among the world's 20 largest economies.

The yuan hasn't risen more than 0.15 percent intraday since China scrapped a peg to the US dollar on July 21, in contrast with the maximum 0.3 percent the central bank said it would allow.

China's currency was last stronger than eight on Dec. 31, 1993, before the government devalued it against the US dollar. China also since then stopped using a specific currency for foreigners and international trade called Foreign Exchange Certificates.

The Treasury, in its twice-yearly review of world exchange rates, said China has made "far too little progress" in currency flexibility. Still, steps to loosen control over the yuan, and promises to do more, suggest the government isn't deliberately manipulating its currency, the review added.

"The US may be taking a soft approach on China, which is probably the right approach," said Jimmy Koh, head of Treasury research at United Overseas Bank in Singapore.

"It's provided a breathing space for China to respond. This is probably the start of more adjustment on the yuan," he said.

Such a strategy may draw fire from Senators Charles Schumer and Lindsey Graham, who propose a 27.5 percent tariff on imports from China should the yuan fail to rise faster. Schumer last Wednesday said he was "disappointed" with the Treasury decision.

The US will press China "every day" for more loosening, while opposing "protectionism," Treasury Undersecretary for International Affairs Tim Adams said in Washington the next day.

A customs bureau report last Friday showed China's trade surplus was larger than expected last month. The US$10.5 billion surplus compared with the US$7.2 billion median estimate of 21 economists in a Bloomberg survey, and the US$11.2 billion in March. China's economy grew 10.2 percent in the first quarter from a year ago.

China may offer further concessions on its exchange rate as payback for the US Treasury's stance, including widening the band in which the yuan trades, said Daiwa Institute of Research.

The government will pursue measures to make the yuan more responsive to market forces, Reuters reported, citing a draft of a joint statement by China and the EU.